Here’s why I think AMD stock should be higher

The semiconductor sector has been on a tear lately, but here’s why Gordon Best thinks AMD stock still has plenty of room to run.

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Advanced Micro Devices (NASDAQ: AMD) has been a giant in the semiconductor industry for years, with a strong focus on innovation. Plenty of companies in the sector have rallied in recent years, but I still think there are reasons AMD stock should be higher.

Data centres

Data is expected to be the next major commodity. Having the right resources to handle this within organisations and governments is going to be massive over the coming decades.

Like many in the sector, the business has shown very strong demand for such products. Key segments such as data centres grew 80% year on year (yoy), while the client segment saw an impressive 85% yoy growth. This growth can be attributed to the robust demand for AMD’s MI300 chips for AI data centres.

Competition in the sector is incredibly challenging. Nvidia currently leads the charge in graphical processing units (GPUs), taking between 80% and 95% of the market share. AMD has made strategic moves to claw back some of this market, but with so much potential, there is plenty of profit to go around.

The company has expanded its product portfolio, including the acquisition of Xilinx, which has allowed it to diversify its business and explore opportunities in key markets such as the automotive sectors.

AI in PCs

The key driver will be AI capabilities being integrated into the next generation of PCs and laptops. For me, this is where AMD really specialises.

In a recent earnings call, CEO Lisa SU provided incredibly optimistic commentary about the personal computer market. While PC sales have slowed, as many consumers made purchases during the pandemic, the company expects a massive replacement cycle to kick into high gear this year. To me, this suggests the possibility that the latest rally in the sector is just getting started.

The business stated it will launch its new mobile processor later this year, “enabling next-generation AI experiences in laptops that are thinner, lighter and faster than ever before.”

This transformative technological shift could convince many consumers and enterprises that previously moved away from PCs to purchase new AI-powered models, with demand already surging.

We see AI as the biggest inflection point in personal computers since the internet.”

Lisa Su, AMD CEO

Just as the internet sparked massive PC adoption, AI could drive a modern-day super cycle of PC purchases. I see the business being very well positioned to take advantage.

Risks

Of course, none of this excitement and expectation is a guarantee. AI has been an area of huge hype and speculation, which can lead to a dangerous type of investing. The business also indicated that gaming console and graphics card sales remain sluggish, potentially eating into profits.

Moreover, the market has historically overvalued AMD’s stock, as indicated by a discounted cash flow calculation. This calculation suggests the share price is already about 34% overvalued. Many say the growth of the sector skews these figures, but it’s always something I want to consider.

Am I buying?

To me, the company’s strategic market positioning supports the argument for a higher stock valuation. Of course, nothing is simple in such a fast moving sector, but with so much potential for growth, I’ll be buying AMD stock at the next opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Advanced Micro Devices. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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